Servicing Transfers During

Loss Mitigation, including

Note Sales by FHA/FHFA

Summer Mortgage Conference

John Rao
Geoff Walsh
National Consumer Law Center
 Servicing Transfer Requirements
Privately enforceable requirements:

New servicer must comply with 1024.41 even if borrowers

prior applications with former servicer were evaluated OI,
41(i)-1

Documents and information transferred from a former servicer

to new servicer may be a loss mitigation application and may
require a new servicer to comply with 1024.41 OI, 41(i)-1

When a mortgage is transferred, new servicer must obtain loss

mitigation documents and information submitted by borrower
to former servicer and comply with 1024.41 OI, 41(i)-2 2
 Servicing Transfer Requirements
Privately enforceable requirements:

If borrowers application is complete and being evaluated

when mortgage is transferred, new servicer should continue
the evaluation to the extent practicable - OI, 41(i)-2

Documents in a complete application are received for purposes

of timelines as of date they were received by former servicer,
not new servicer - OI, 41(i)-2

NOE covered error includes: Failure to transfer accurately and

timely information relating to servicing of a borrowers
mortgage loan account to a transferee servicer- 3
1024.35(b)(7)
 Servicing Transfer Requirements
General servicing requirements (not directly enforceable
through private right of action under RESPA):
Transferor servicers must have policies and procedures to ensure that
documents and information relating to a transferred mortgage loan
are transferred to the new servicer in a timely and accurate manner -
1024.38(b)(4)(i)
A transferee servicer must identify necessary documents or
information that may not have been transferred by a transferor
servicer and obtain such documents from the transferor servicer
1024.38(b)(4)(ii)
A transferor servicer's policies and procedures must be reasonably
designed to ensure that the transfer includes any information
reflecting the current status of discussions with a borrower regarding
loss mitigation options, any agreements entered into with a borrower
on a loss mitigation option, and any analysis by a servicer with
respect to potential recovery from a non-performing mortgage loan, 4
as appropriate. OI, 38(b)(4)(i)-2
Recent Decisions
Guillermo v. Caliber Home Loans, Inc., 2015 WL 4572398 (N.D.
Cal. July 29, 2015)
Transferor Chase failed to transfer application documents (
1024.38(b)(4)(i))
Transferee Caliber demanded new application and failed to
evaluate one submitted to prior servicer ( 1024.38(b)(4)(ii))
Court did not consider that 1024.38 is not privately enforceable
Better to characterize as failure to evaluate under 1024.41 or
set up using NOE
Damages rejects borrowers own default as cause of all
damages
Dent v. Inv. Corp. of Am., 2015 WL 9694807, at *5 (E.D. Mich.
Dec. 23, 2015) (Mortgage servicers thus may not escape their
duty to address loan modification requests by simply noting
that such requests were made to a prior servicer.). 5
Distressed Loan Sales
Who is selling them?
Government guarantors & insurers
FHA, Fannie Mae, Freddie Mac
2010-12 foreclosure backlog
Mostly in judicial foreclosure states
Sales cut insurance losses
Private loan owners selling too
e.g. Bank of America direct sales to investors
Distressed Loan Sales
Who is buying them?
Hedge funds & private equity firms
Bayview Asset Acquisitions (Blackstone)
Lone Star Funds (Caliber)
Purchased 22,447 FHA loans in single auction
6/11/14 for $3.9 billion
Selene Investment Partners (Lewis Ranieri)
Non-profits about 2% through DASP
Distressed Loan Sales
What are they doing with the loans?
Buyers securitize distressed assets
Re-sell loans for a profit
Large investors creating single-family rental industry &
marketing bonds
Invitation Homes owned by Blackstone
American Homes 4 Rent
HUDs Distressed Asset Sales
Program (DASP)

What it involves:
FHA-insured loans
In default, but pre-foreclosure sale
Grouped in pools (100-1000+ loans per pool)
HUD sells the loan pools at public auctions
DASP - Purpose
According to HUD, two goals:
Revenue for insurance fund, cover past losses, reduce
future damage from delayed foreclosures
Allow more flexible loss mitigation options (i.e.,
principal reduction) for borrowers
DASP Mechanics

No foreclosure sale before HUD pays claims

HUD pays off lender/servicers claims as DASP sale
completed
HUD used to pay off claims only after servicer completed
sales
Statute changed to allow HUD to pay claims off before
sales (loans three months in default) 12 U.S.C. 1710.
DASP- Effect on Borrowers
Note transferred to HUD
Mortgage assigned to HUD
Transfer to new private buyer purports to end loans
participation in FHA program
Decisions on loss mit. and foreclosure now up to loans
new owner
DASP Effect on Borrowers
Note sales short-cut state foreclosure procedures
Many recent state laws require mediation,
documentation of loss mitigation reviews
DASP sales remove loans from procedures that hold FHA
servicers accountable for compliance with FHA rules
Philadelphia, New York mediation examples
DASP Two Types of Loan Pools
National Pools
Neighborhood Stabilization Outcome (NSO) Pools
(focus on a city or region)
DASP What Happens to NSO
Pools?
Bidder must qualify under special bidding contract (may
be a non-profit, but dont have to be one)
No foreclosure sale for 12 months after purchase
(previously 6 months)
Must meet target outcomes for 50% of loans in pool
Four years of reporting to HUD
Penalties possible if fail to meet 50% target
Must evaluate borrowers for a HAMP-like modification
Not clear what this means or how is enforced
DASP What are Countable NSO
Outcomes
For 50% of loans in pool purchaser may do one of
following:
Collect payments for 6 mos.
Short sale to a new owner-occupant
Rent property out for three years
Give away to non-profit
For the other 50% of loans in NSO Pool, no limits on
disposition
DASP What Happens to National
Pools?
Some changes prospective from April 2015:
No foreclosure sale for 12 mos. (formerly 6 mos.) after
purchase
Must evaluate borrowers for a HAMP-like modification
Not clear what this means or how is enforced
No restrictions on disposition after 12 mos.
DASP Numbers
FHA loans sold to May 2016: 112,892
FHA loans sold just in 2014: 45,979
Total value of loans sold: $18 billion
About 98% of FHA loans are bought by for-profit entities
Percent of BPO recovered (2014-15):
68%-78%
Percent of UPB recovered (2014-15)
52%-66%
2014 DASP Sales Breakdown
June 11, 2014
22,447 loans (national unrestricted pools)
June 25, 2014
4,224 loans (NSO pools)
September 30, 2014
14,023 loans (national unrestricted pools)
November 19, 2014
5,285 loans (NSO pools)
DASP Aged Portfolio Sale
May 18, 2016
7,892 loans sold, on average more than 48 months
delinquent
Heavily from NY, NJ, MD
Recovery of 50-60% BPO and 40-60% of UPB
DASP Sales
Whose loans are these?
March 2013 NSO pools all from BofA
June 2013 National Pools 75% BofA & Chase
Where do they come from?
National Pools Heavily FL, NY, NJ, OH, IN
NSO Pools Many in Chicago, Ohio & Florida metro
area pools, more recently Maryland, Calif. June 2014 -
Detroit
DASP Sales - Problems
Did servicer/owner effectively review for all FHA loss
mitigation options before payoff and transfer of loan to
HUD?
Review at specific time frames: at 90 days, then
ongoing monthly
Notices, face-to-face meeting before foreclosure
Notice of DASP sale to Borrower
No roadmap
Need more than RESPA servicing transfer notice
In HUDs view, ongoing participation in insurance
program terminated
DASP Sales
Litigation issues
Available claims will depend heavily on state law e.g.
contract claims, UDAP
May be hard to claim that the borrower is a third party
beneficiary of the note sale contract.
Loss of bargained-for FHA insurance benefits as breach of
contract, due process violation?
DASP Sales
Lenders will argue that because the loan is no longer FHA
insured, the regulations, and any non-compliance, no
longer apply.
But the non-compliance likely occurred while the loan
was still FHA insured
Argue the acceleration pre-DASP sale was invalid under
loan documents and 24 C.F.R. 203.600, et seq.
DASP Sales
As a general principle, the sale of the loan should not by
itself cure failure to comply with FHA regulations.
The new servicer receives the loan with the non-
compliance already in place.
Rather than starting fresh and forgiving past due
payments that accrued while the loan was insured, the
new servicer often pursues the entire amount that the
previous lender claimed due
Breach of Contract
The foreclosing partys duty to comply with FHA servicing
regulations is expressly incorporated into the mortgage
and note
This Security Instrument does not authorize
acceleration or foreclosure if not permitted by
regulations of the Secretary.
Parties Liable
It may be beneficial to have the old owner in the
lawsuit it will provide an opportunity to address
the former owners non-compliance.
Consider UDAP claim against former FHA servicer
that certified to HUD it had complied with FHA loss
mitigation guidelines
GSE Loan Sales
Freddie Mac
200,000 delinquent loans 90+ days (12/14)
7 loan sales held from July 2014 to Sept. 2015 (20,456
loans sold for $4.5 billion)
High share in judicial states (FL, NY, NJ)
Two classifications
Standard Pool Offerings
Extended Timeline Pool Offerings
GSE Loan Sales
Recent Freddie Mac sale (Sept. 2015)
5774 Ocwen loans sold for $1.1 billion
On average 3.5 years delinquent
One-third previously modified
Three largest of five pools purchased by Lone Star
affiliate
Freddie Mac NPL Sales
GSE Loan Sales
Fannie Mae
2015: 14,100 distressed loans sold
2016 (Jan. July): 18,200 offered
pools sold for 50-70% of BPO
Avg. 3-5 years mos. in arrears
Small pools (typically 100 or fewer loans) for non profits
GSE Loan Sales
General FHFA post-sale requirements (March 2015)
Pre 2009 borrowers must be evaluated for Treasury
HAMP (but HAMP expiring 12/16!)
Post 2009 borrowers for proprietary mod without fees
or prepayment
Complete pending applications & maintain prior
modifications
Waterfall requirement (foreclosure last option)
Servicer obligations transferable
GSE Note Sales
FHFA changes announced April 14, 2016
To require buyers review for principal reduction, but
Requires only review in limited cases
Subject to proprietary NPV test
No real limit on servicer discretion in review
Limit on post-modification interest rate increases
Curtails the Lone Star/Caliber abuse of 5-year
forbearance plans
RESPA Claims and Note Sales
RFI to buyer for pre-sale loss mitigation records of selling
servicer
NOE to new servicer based on non-compliance with
FHA contract documents?
RFI for buyers loss mitigation review activities and
standards
New servicer, new application
Must review consistently with FHA and GSE guidelines
for note purchasers
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